Hershey’s Profits May Melt as the Earth Warms

Climate change will reduce cocoa bean supply by 2030. Hershey will need to adapt its business practices to remain competitive.

Global climate change is threatening the future of cocoa beans.  Although cocoa beans can withstand high temperatures, it requires humid conditions.  Temperature increases coupled with an unchanged projection in rainfall will lead to dryer climate will lead to decreasing crop yield.  Cocoa beans grow in a few concentrated regions – 70% of the world’s cocoa beans originate in Côte D’Ivoire and Ghana.[i]  By 2050, rising temperature will render 89.5% of those regions less suitable to grow cocoa beans, and farms will need to move to higher altitude to adjust. [ii]  Declines in cocoa production can occur as soon as 2030, driving cocoa bean prices upward.[iii]

Suitability Change for Cocoa Growing Regions by 2050
graph

The Hershey Company (NYSE: HYS), a US producer of chocolates and other confectionery, has been well aware of the threat of decreasing cocoa bean supply as the younger generation of farmers switch from planting cocoa beans to less labor-intensive and more profitable crops.[iv]  Realizing that climate change will further exacerbate this trend, Hershey has already implemented changes in its supply chain.

Raising the (Chocolate) Bar for Responsible and Sustainable Sourcing

In 2012, in response to campaigns of activist groups for ethical sourcing practices, Hershey announced a commitment to source 100% of its cocoa from certified sustainable sources by 2020.[v]  To achieve this goal faster, the company launched the Learn to Grow program, a three-year training program which teaches family farmers in updated methods to cultivate cocoa beans in hotter drier climate to increase productivity.  Once those farms meet certification standards, Hershey purchases the certified sustainable cocoa beans at a premium, increasing the revenue each farm generates.[vi]  Thus far, the company is a year ahead of schedule as it is expected to source 50% from certified sustainable sources in 2016.  Hershey has also partnered with local governments (especially the Ghanaian government) to launch CocoaLink, which uses cheap mobile phones as a platform to share the latest farming technology and best practices through free SMS text messages.[vii]  In addition to its partnership with government, the company founded CocoaAction with the World Cocoa Foundation to coordinate additional programs to help cocoa farmers in West Africa.[viii]

A Farmer Uses CocoaLink to Receive Farming Technology Updates

 cocoalink

Good, but Not Good Enough

The programs Hershey implemented are a good start to adapting to the changing climate; the company will need additional levers to stay competitive in the confectionery industry.

  1. Hire a meteorologist: climate change will not only increase global temperatures in the long term, but also increase weather variability in the short term. A meteorologist can predict weather patterns in the short term and plan for more drastic changes in weather that may lower yield.  Mars, a major competitor, has recently hired a meteorologist to help make sourcing decisions.[ix]
  2. Diversify geographies where cocoa beans are sourced: to de-risk the impact of variable weather, Hershey should source cocoa beans from SE Asia and Latin America in addition to West Africa.
  3. Show importance of sustainable chocolate to the consumer: Hershey should increase awareness of sustainable cocoa sourcing and use it as a competitive advantage.  An example could be to launch a limited edition earth-shaped chocolates once Hershey reaches the 100% certified sustainable cocoa bean target.

The Dark Side of Chocolate?

Although Hershey’s efforts toward certified sustainable sourcing are laudable, they may not result in any positive impact for the company itself or the farming community.  The Cocoa Barometer (a report by various NGOs on sustainability issues in cocoa) sites two major challenges in the certified cocoa production process.  First, the auditing process that ensures farmers are meeting sustainability standards are often unreliable as many control visits on farms are announced beforehand.  Second, there is a lack of evidence of any long-term positive impact of the certified standards on the environment and on cocoa farmers.[x]  The chocolate industry has had a checkered past in terms of labor practices.  Cocoa farmers are paid less than $2.50 per day even including premiums paid for sustainable cocoa.[xi]  There have also been ample reports of unpaid child labor and forced labor on farms.  Although the initiatives implemented have moved Hershey in the right direction toward combating climate change, should it take more stringent approaches to measure the impact of its programs on cocoa bean yield?  Furthermore, given the interdependence between farmers and the company, does Hershey have a responsibility to change these programs if they do not improve farmers’ livelihood?  If so, which should take priority?

Word Count: 738 words

 

Sources:

[i] Barclay, Eliza. “Why The World Might Be Running Out of Cocoa Farmers.” http://www.npr.org/sections/thesalt/2015/07/03/419243305/why-the-world-might-be-running-out-of-cocoa-farmers. Published Jul 2015, Accessed Nov 2016.

[ii] Läderach, P., Martinez-valle, A., Schroth, G., & Castro, N. (2013). Predicting the future climatic suitability for cocoa farming of the world’s leading producer countries, ghana and côte d’ivoire. Climatic Change, 119(3-4), 841-854. doi:http://dx.doi.org.ezp-prod1.hul.harvard.edu/10.1007/s10584-013-0774-8

[iii] Stecker, Tiffany. Climate Change Could Melt Chocolate Production.  https://www.scientificamerican.com/article/climate-change-could-melt-chocolate-production/. Published Oct 2011, Accessed Nov 2016

[iv] Barclay, Eliza. “Why The World Might Be Running Out of Cocoa Farmers.” http://www.npr.org/sections/thesalt/2015/07/03/419243305/why-the-world-might-be-running-out-of-cocoa-farmers. Published Jul 2015, Accessed Nov 2016.

[v] Global Exchange et. Al.  “Time to Raise the Bar: The Real Corporate Social Responsibility for the Hershey Company.”  https://www.greenamerica.org/PDF/HersheyReport.pdf. Published Sep 2010, Accessed Nov 2016.

[vi] “Learn to Grow Cocoa: Sustainable Cocoa Farming.” https://www.thehersheycompany.com/en_us/responsibility/good-business/creating-goodness/learn-to-grow.html. Accessed Nov 2016.

[vii] “CocoaLink: Knowledge in the Farmer’s Pocket.” https://www.thehersheycompany.com/en_us/responsibility/good-business/creating-goodness/cocoa-sustainability/cocoa-link.html. Accessed Nov 2016.

[viii] “CocoaAction.” https://www.thehersheycompany.com/en_us/responsibility/good-business/creating-goodness/cocoa-action.html. Accessed Nov 2016.

[ix] Taylor, Kate.  “The Smart Reason the World’s Largest Candy Maker is Hiring Meteorologists.” http://www.businessinsider.com/mars-chocolate-hires-meteorologists-to-deal-with-climate-change-2016-9. Published Sep 2016, Accessed Nov 2016.

[x] “Cocoa Barometer 2015.” http://www.cocoabarometer.org/Download_files/Cocoa%20Barometer%202015%20Print%20Friendly%20Version.pdf. Accessed Nov 2016.

[xi] Gunther, Marc.  “Hershey’s Uses More Certified Sustainable Cocoa, but Farmers May not be Seeing the Benefits.” https://www.theguardian.com/sustainable-business/2015/jul/06/hersheys-mars-ferrero-cocoa-farming-fair-trade-global-exchange.  Published Jul 2015, Accessed Nov 2016.

 

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7 thoughts on “Hershey’s Profits May Melt as the Earth Warms

  1. My report was on a large player in the wine industry. One of the innovative ideas the industry is heading towards is creating new strains of grapes that require less water and can endure warmer temperatures. I wonder if there is an opportunity for Hershey to begin thinking about researching and engineering new types of chocolate that adapt to climate changes? Not sure about the potential health of affects of engineering cocoa, but as long a it tastes good, consumers might be okay with the idea?

  2. Interesting post, Nancy! I never knew that two countries produced most of the world’s chocolate! I think the suggestions you made are great, but I also wonder if Hershey could take a page out of Indigo’s book and genetically modify the cacao bean to be able to flourish in the warmer and more volatile climates. They could then use meteorologists to understand how their climates will change and get ahead of it with their modified beans. Bloomberg has an article about it that I think you might find interesting. In it, it talks about how Ecuador has come up with a strain of chocolate that is immune to witches broom (a fungus that impacts chocolate) and yields 7x the chocolate of regular beans, but the taste is bad. If you would like to learn more about this, please visit this site: http://www.bloomberg.com/news/articles/2014-11-14/to-save-chocolate-scientists-develop-new-breeds-of-cacao

  3. Nancy, thanks for the interesting read on one of my favorite topics: chocolate!

    The Learn to Grow program really resonated with me while I was reading your post. In my opinion, Learn to Grow is a long-term strategic program that gets at the root of the problem: how to cultivate cocoa beans in drier and warmer climates. Purchasing these cocoa beans at a premium not only contributes to Hershey’s social impact, but also incentives local farmers to retain cocoa beans as their primary crop. I wonder if this program can be self perpetuating in the sense that farmers who learn this skill-set can teach others in their community and the next generation.

    Beyond Learn to Grow, I see potential roadblocks with engaging consumers in sustainability. Hershey’s, in the mind of consumers, is a mass market commodity brand. Most chocolate brands that do promote sustainability usually sell at a higher price point and are considered premium. For instance, Endangered Species Chocolate asks consumers to “Indulge for a Cause” by donating 10% of gross profits to various wildlife foundations. Given its social cause and premium ingredients, Endangered Species Chocolate is able to sell at a higher price point; however, Hershey’s caters towards the mass market chocolate buyer. Will they be willing to pay more for the same quality chocolate?

    I also agreed with

  4. Thanks Nancy for a great post! I didn’t know about the Learn to Grow program and how it fits into Hershey’s overall strategy in addressing climate change. I am wondering though if it’s potentially doing more harm than good in West Africa, and how sustainable the program is, if Hershey is the only company in the chocolate industry that is undertaking this initiative. As Hershey becomes the sole purchaser of these premium beans, farmers will only grow this type of bean, and therefore will no longer be able to sell to other potential buyers (assuming these buyers, i.e. other chocolate companies, are not interested in purchasing these premium beans). So the moment Hershey ends this program and pulls out, the smallholder farmers are left with excess supply and may lose their businesses immediately. I would argue that in order to make these sourcing practices actually effective and welfare-enhancing for supplying countries, and actually make a dent in fighting climate change, Hershey should initiate the entire industry to engage in these sourcing practices that enable long-term, widely shared sustainable gains.

  5. Thanks for sharing Nancy! Interesting post on a major player in the industry and what they are doing to remain competitive. It’s scary to think that these issues will be happening as soon as 2030. Additionally, the impact on the environment as well as the lives of millions of farmers in the industry is devastating. Do you know what the company is doing to find new cropping areas? Additionally, have they done anything to develop alternative cropping strategies?

    Also, I’m curious to see the role Hershey’s plays as a new CEO takes over in 2017.

  6. Nancy, I was fascinated to see the innovative approach Hershey’s has taken to solve the issues they are facing as a result of climate change. They have employed a variety of initiatives to help them achieve their 100% certified sustainable sources by 2020 goal. It was great to hear how they put their money where their mouth is a provide financial incentives to farmers to change their practices by purchasing certified cocoa beans at a premium. This is a way to enact long term change in the industry while also meeting their sustainability goals. Clearly this methodology is working as they are already sourcing cocoa beans from 50% certified sustainable sources as you noted in your post. However, in your suggestions for what else they could be doing, your third bullet in particular has a lot of merit in my opinion. As a market leader and one of the most widely recognized brands in the world, Hershey’s not only has an opportunity but an obligation to set the sustainability bar high. By increasing awareness of the issue and of their practices, they can force their peers to do the same in order to remain competitive.

  7. Nancy, I imagine most chocolate-lovers are running scared to stock-up on chocolate. Hershey has gone the right way at requiring certified cocoa sources from 2020 onwards. The company should start pushing these practices accross the entire chocolate industry.

    However, if the climate continues to change as expected, the company must start thinking now on a plan B for their cocoa sources. It takes almost five years for a cocoa tree to produce its first cocoa pod. [1] Sourcing form a new country would require major investments that would take even longer to be completed. In order to continue in business, the company should start researching where, after the major climate changes we are living, it will be possible to grow cocoa. Chocolate-lovers would be eternally thankful.

    [1]http://www.chocolate.org/articles/the-cacao-tree–facts-about-theobroma-cacao.html

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